Stockholm (HedgeNordic) – In the current uncertain market environment, institutional investors are concerned about what they are seeing on the investment horizon and have been increasingly looking for liquid alternatives to allocate capital. “Investors are contemplating where to go from here,” points out Jonas Börjesson, Partner and Co-Head of Investor Relations at Brummer & Partners. “We are in unchartered territories.”
“There are a lot of risks and opportunities out there, starting from rising inflation to rate hikes, geopolitical tensions, and unfortunately a war, worries about slowing economic growth, company profits, among many others,” elaborates Carl-Johan Brodowsky, Partner and the other Co-Head of Investor Relations at the hedge fund powerhouse. “This means more volatility, which is a good starting point for us and our multi-strategy vehicle to take risk as there are more idiosyncratic opportunities to exploit.”
“We are in unchartered territories. This means more volatility, which is a good starting point for us and our multi-strategy vehicle to take risk as there are more idiosyncratic opportunities to exploit.”
The Brummer & Partners Model
For more than 25 years, Brummer & Partners has nurtured an entrepreneurial model that enables portfolio managers with specialist skills around the world to set up their own fund management companies, jointly owned with Brummer & Partners, and to capitalize on idiosyncratic dislocations and opportunities. To enable the portfolio managers’ complete focus on alpha and risk management, they are supported by a solid infrastructure in the Brummer & Partners group offering risk control, fund administration, distribution, reasonably sticky assets and everything else a fund manager may need.
“Our long-term approach and true partnerships attract high-level portfolio managers across the globe,” emphasizes Brodowsky. “We build successful asset management businesses hand-in-hand with the managers,” he continues. “We want them to shape their own firms and funds, this is key in attracting the right interest alignment and creating the drive to generate performance through alpha, which is and always will be, our steadfast focus.”
Evolution of a Multi-Strategy
That interest alignment in generating alpha has been essential in the 25 year-evolution of the hedge fund group. Starting out as a seeder of single-strategy hedge funds, Brummer & Partners has for decades devoted its evolution to the fund Brummer Multi-Strategy (BMS). Established in 2002, BMS is an active well-balanced multi-strategy portfolio that should generate competitive risk-adjusted returns by allocating risk to an optimal number of strategies in the Brummer & Partners group, strategies that over time have low correlation to each other and to market developments or beta. “The unifying goal of all portfolio managers is to generate alpha and the objective for BMS is to construct the best possible portfolio, and a risk-reward profile that is uncorrelated, hence diversifying.”
“The unifying goal of all portfolio managers is to generate alpha and the objective for BMS is to construct the best possible portfolio, and a risk-reward profile that is uncorrelated, hence diversifying.”
A genuine multi-strategy approach should seek to offer diversification, liquidity, crisis alpha (downside protection) and return potential in any market environment. Up and running for 20 years, BMS has achieved an inception-to-date Sharpe ratio above one and an annualized return of about six percent in SEK through the end of March 2022, with the fund incurring only three down years since inception (low single-digit losses). “The core of the success really stems from the all-weather type of portfolio with different types of liquid strategies that have low correlation to each other and to risky assets,” says Börjesson.
“The evolution is a matter of fine-tuning our processes. We still learn every day, and we have taken several important steps into a solid multi strat that adds long-term investor value,” continues Börjesson. “As opposed to a fund-of-hedge funds, a solid multi-strategy like BMS allocates risk based on sophisticated analyses in real time,” he emphasizes. “Even meticulous institutional investors are impressed when we monitor our process of analyses, our stress testing and risk allocation.” Although informed investors have the capacity to build their own hedge fund portfolios, it is becoming more challenging as dispersion in hedge fund returns has increased.
“The evolution is a matter of fine-tuning our processes. We still learn every day, and we have taken several important steps into a solid multi strat that adds long-term investor value.”
“It takes a lot of time, effort, expertise and experience to find good managers, keep track of them, and more importantly, to build a well-balanced and robust portfolio that can withstand all market environments,” according to Börjesson. “It is not a simple task for institutional investors to construct, monitor and rebalance their own portfolio of single strategies,” he argues. The process of building a robust all-weather portfolio and keeping track of all positions and risk exposures within the portfolio requires time, effort and experience.
“Our partnerships with the portfolio managers mean partnerships in expertise, knowledge, intelligence, and insights in real-time.”
The setup at Brummer & Partners enables full transparency across all managers, and across thousands of positions in hundreds of markets. “We can monitor positions and risks on a real-time basis,” says Carl-Johan Brodowsky. “And our partnerships with the portfolio managers mean partnerships in expertise, knowledge, intelligence, and insights in real-time,” he emphasizes.
New Structure to Capture More Talent
Jonas Börjesson also mentions that their multi-strategy platform represents a dynamic type of business. “A multi-strategy portfolio should be adaptive and the turnover of strategies within a multi-strategy approach is expected and natural,” says Börjesson. “We always strive to build and manage the best possible portfolio for our investors. If one building block is not up to the standard, we will act.”
As part of the constant evolution, Brummer & Partners now enjoys a greater ability to tap into an expanded talent pool after creating a new structure called “PM pods.” This allows the onboarding of new managers to run dedicated investment mandates exclusively for BMS investors. In late 2021, Brummer & Partners announced the recruitment of technology-focused portfolio manager Henrik Nyblom from Swedbank Robur Ny Teknik – one of Europe’s largest tech funds – to run the first pod, a segregated mandate within BMS.
“The PM pods make our platform attractive to new talent by giving them flexibility, freedom and opportunities.”
“The PM pods make our platform attractive to new talent by giving them flexibility, freedom and opportunities,” says Brodowsky. Some niche strategies may have limited ability to deploy a lot of capital, which means that “some specialized strategies may not be appropriate or feasible for a full fund launch,” according to Brodowsky. “There is fierce competition for talent within the global multi-strategy space, and this structure gives us another tool in our toolbox to bring in new managers and new talent.”
Devoted to Continue
BMS has managed to advance 2.9 percent in the turbulent first three months of 2022, with systematic trend-following strategies contributing to performance as the other strategies such as sector specialist equity market-neutral strategies holding ground. The leveraged version of BMS, BMS 2xL, has advanced 5.6 percent. “There are no major directional bets in the portfolio,” explains Brodowsky. “Most of the portfolio consists of idiosyncratic risk-taking and very little directional risk. We are a risk-focused organization, so everything starts from a risk perspective and that has been reflected in our portfolio,” argues Börjesson.
“Most of the portfolio consists of idiosyncratic risk-taking and very little directional risk. We are a risk-focused organization, so everything starts from a risk perspective and that has been reflected in our portfolio.”
“In the last years, we have been living in a QE-driven environment with excess capital, low rates, no inflation, hence a challenging environment for hedge funds in general,” acknowledges Börjesson. “Looking forward, as we are now getting back to more normal markets, we will have very good opportunities to at least repeat what we have done over the last 20 years,” he considers. “All in all, with our institutional set-up, skills and edge, we are humbly convinced that we will be able to capitalize on the opportunities that we outline ahead and to continue to deliver uncorrelated returns to our clients,” concludes Börjesson. “To us, it’s also a matter of evolution as we constantly improve our own models, our processes and the way we operate.”
This article features in HedgeNordic’s “Nordic Hedge Fund Industry Report.”